Beating Innovation to Death

There is a tendency in America of late, or maybe for awhile, to over-analyze to the point of distraction. So too is the case with the Social Innovation Fund, the federal government’s $50+ million experiment in providing growth capital to nonprofits. This great experiment to see whether government can do something pretty different to address social problems is in danger of being railroaded by leaders of the social innovation community who should be the ones most supportive of a new day for government.

The Social Innovation Fund (SIF) was modeled after the idea of venture philanthropy funds who were themselves modeled on venture capital funds. The idea with the SIF is to grant $50 million to private grantors (foundations, venture philanthropy funds, etc) who match the money and then turn around and grant it to promising nonprofits to scale their proven programs. Is the idea really innovative? No. But what is innovative is that the government is  recognizing the concepts of social innovation and scale and is experimenting with becoming a builder instead of just a buyer of nonprofit services.

But this experiment is in danger of failing before it even gets out of the gate. A major controversy developed this week with the announcement of SIF grantees. The controversy centers around whether New Profit, arguably the inventor of the venture philanthropy concept, was given preferential treatment in being awarded a grant.  Paul Light, the Nonprofit Quarterly and others voiced their concerns about the granting process. You can read all the details of the saga here.

Let’s be honest, everyone knew New Profit was going to get a SIF grant. New Profit pioneered the idea of venture philanthropy. And their spin-off organization, America Forward, which works to connect the vast governmental resources to social innovation, was behind getting the Serve America Act,  containing the SIF, formulated and made into law.  Would the SIF make any sense without New Profit? They have been scaling nonprofits for years, and they have unlocked the door between government and social innovation. How could they not be at this table?

And the growing amount of documents being released by the Social Innovation Fund demonstrates the fairness and process behind the grant awards and more than makes up for any of SIF’s initial ignorance of the importance of transparency.

I understand that discussion, transparency, and refining of process are all critical elements to getting change to happen, but too much of that before the actual experiment happens can actually prevent change. Let’s not conduct business as usual by over-analyzing a new project to death. Let’s see where this experiment takes us instead of railroading it before it even begins. It’s not perfect innovation, it’s not a perfect process, but experiments never are. If we don’t give the government some space to actually innovate, they may never go down this road again. Instead of beating innovation to death, let’s get out of our own way and see where this goes.

Tags: America Forward, builder versus buyer, New Profit, Nonprofit Quarterly, Paul Light, Serve America Act, Social Innovation Fund, Venture Philanthropy

Will the Social Innovation Fund Really Change the Nonprofit Market?

Last week a new head of the federal Social Innovation Fund, the $50 million public/private fund to scale innovative nonprofits that came out of the Serve America Act, was named. Paul Carttar brings a wealth of experience and knowledge having worked at New Profit, the first venture philanthropy fund, and Bridgespan and Monitor consulting groups, the largest and most sophisticated consulting firms to large nonprofits. He knows how to scale proven nonprofit models.

But we need to be cautious about how much the Social Innovation Fund can do to transform the nonprofit capital market. While it will provide mezzanine funding to the best nonprofits, there are still some glaring holes in the capital available to the rest of the nonprofit sector. You can read my post “Will the Social Innovation Fund Really Change the Nonprofit Market?” at the Change.org blog.

Tags: Bridgespan, Monitor, New Profit, Paul Carttar, Serve America Act, Social Innovation Fund

The Beginnings of a Social Capital Market

One of the key things necessary to fundamentally change our ability to solve social problems is the creation of a social capital market.  By social capital market I mean that financial tools and vehicles of a significant size, volume, variety and usefulness are made available to social entrepreneurs and ventures.  Nonprofits and social businesses are sorely undercapitalized.  In order to really change their ability to scale and attack problems at their root cause we need to create significant social capital through various means (philanthropy, equity, debt, etc).  This past week highlighted some exciting developments in the social capital market space.

First, late last week the Senate passed the Serve America Act, which the House and President are also expected to approve, which, among other things, creates a A Social Innovation Fund Pilot Program.  The Pilot Program will pool government and private investments into a venture philanthropy fund to scale successful nonprofit programs. It would make $50-million available in 2010, growing to $100-million in 2014, with matching funds required from other sources.

Second, Root Capital, a nonprofit social investment fund that provides capital, financial training and market connections to grassroots businesses that build sustainable livelihoods and transform rural communities in poor, environmentally vulnerable places announced last week their launch of a $63 million growth capital campaign, in partnership with the Nonprofit Finance Fund (another leader in the creation of social capital vehicles).  The growth capital will allow Root Capital to:

• establish a sustainable social enterprise and fully self-sufficient lending program by 2013
• accelerate its ability to impact global poverty by linking rural small and growing businesses with capital markets
• triple its loan portfolio, enabling it to lend $121 million each year to more than 350 grassroots businesses, representing one million households

The campaign will be a combination of philanthropic equity and debt capital.  They expect their investors to include foundations, corporations, socially responsible investment firms and individuals. Funders and investors already committed include The Kendeda Fund, The Rockefeller Foundation, and the Skoll Foundation.

And finally, last week was the Skoll World Forum on Social Entrepreneurship, the annual gathering of leading social entrepreneurs.  Among many topics of conversation was the creation of a social capital marketplace to support these great social entrepreneurs.  Nathaniel Whittemore captured amazing video interviews with some leading attendees.  Two of these interviews focused on the creation of social capital markets and gave some very interesting insights on how this marketplace is being created and what remains to be done.  First is his interview with Shari Berenbach, the President and CEO of the Calvert Social Investment Foundation.  Shari describes how the Calvert Social Investment Foundation creates a marketplace for investors interested in social innovation:

SWF09 Interviews: Shari Berenbach from Nathaniel Whittemore on Vimeo.

Second is Nathaniel’s interview with Steve Hardgrave, head of Gray Ghost Ventures, which makes early stage equity investments in social ventures.  Steve has a really interesting perspective on the creation of the social capital marketplace and encourages those involved to think much bigger about what is required:

“We need to dream bigger. To think that $100 million is a lot of money, in real world terms it’s not, it’s a drop in the bucket.  So all of us making strides to take this, not to millions or 100 millions of dollars, but billions of dollars is a challenge that we can’t let up.  The urgency of that challenge needs to be very real for us.”

SWF09 Interviews: Steve Hardgrave from Nathaniel Whittemore on Vimeo.

Very true.

Tags: Calvert Social Investment Foundation, Gray Ghost Ventures, Nonprofit Finance Fund, Root Capital, Serve America Act, Skoll World Forum, social capital market, Social Entrepreneurship

Reinvent Austin’s Social Sector

There is much talk lately about what the fallout of our deepening recession will be for the nonprofit sector.  Paul Light gives four future scenarios for the sector, others are pinning their hopes on the new Obama administration, a new economic stimulus plan, and/or the Serve America Act to revitalize and strengthen the sector.  Who really knows what the future will bring.  However, I firmly believe that if we realize the opportunity in these unknowns, we can fundamentally transform a fairly broken sector.  And let’s be honest, the sector is fairly broken:

• The sector is sorely undercapitalized.  It is very difficult to find capital to scale successful organizations, to take out an expansion loan, or to build capacity.  Nonprofits are forced into a continuous fundraising cycle that is difficult at best and nearly impossible in times like these.  And we tend to reward those organizations that keep their “administrative costs,” the very costs that will help them be more effective at what they do, to an absolute minimum.
• Because nonprofit organizations are undercapitalized they cannot pay competitive salaries to attract or keep top talent in their organizations.  That’s not to say there is not top talent in the sector, to the contrary there are incredibly talented people, but they are working much too hard, with very little resources (including adequate staffs) and are burning themselves out.
• Nonprofit boards of directors, the stewards of these organizations, are often not trained in their duties and are too strapped for time to help organizations achieve their missions, grow, and become financially stable.
• The process for becoming a 501(c) 3 is too easy and somewhat unregulated, creating incredible competition for very scarce resources.
• The high-dollar philanthropic funding for the sector comes from individuals and foundations who often have their own theories of change.  Grants tend to be direct-service, not infrastructure, focused and put too many strings on the money.
• Governments who contract with nonprofits increasingly push them to deliver the same or increased level of services for less and less money, creating a move towards rock-bottom priced services.
• There are no rewards in the sector for innovation or risk-taking, in fact innovation is disincentivized.

So, how could we seize the opportunity that the changing economic, social and political climate affords the social sector? What could we in Austin do to innovate out of this situation:

• Our city government could partner with local businesses and venture capital firms to fund a local version of the proposed federal social investment fund.  A pooled fund of government and private money could be invested to grow and build the capacity of nonprofits and social enterprises that deliver great solutions to our community.
• Philanthropists, both individuals and foundations, could make a commitment to fund the capacity and infrastructure of those nonprofit organizations that are demonstrating real results.  These investments would not be direct-service program investments, but rather investments in the high-quality capacity and infrastructure (technology, staff, consulting, etc.) these organizations need to be successful.
• Nonprofits could talk about the social return on investment they offer investors and how they are providing real solutions to the problems we face.  They could encourage their board members and funders to understand what it really costs to provide the high quality services they provide (both direct and indirect costs) and what it would really take to grow to meet the increasing need.

And finally, we could all start to recognize that we can no longer leave nonprofits alone to figure out how to serve more people with fewer resources while the problems that affect all of us get bigger and more complex. We need to recognize that things are changing.  Our economy is changing fundamentally; the government, private and nonprofit sectors are converging; a movement for social innovation is going on nationally.  There is real opportunity for Austin to get involved in, profit from (socially and economically), and potentially lead this movement.  Let’s start that conversation.

Tags: Austin, capacity, Obama, Paul Light, Serve America Act, social investment fund

What the Changing Government Means for Social Innovation

What does the historic election of Barack Obama yesterday mean for the social sector?  It may be too early to tell, but we can get a sense from his policy platforms and interviews.  Both McCain and Obama spoke about social entrepreneurship during the campaign and supported new ideas like a social innovation fund and national service.  It was exciting to see these new ideas taking hold in mainstream politics and the mainstream media.

So, on the day after such an historic election, let’s speculate on what this changing of the guard might mean for social innovation.

First, Obama is a big proponent of national service. He wants to get every citizen involved in serving their country and has said, “As President, I will ask for the active citizenship of Americans of all ages and walks of life.”  His ideas for expanding national service, include:

• Growth of current national service programs like AmeriCorps and the Peace Corps.
• $4,000 tax credits to college students in exchange for 100 hours of community service.
• Expanded programs for engaging retirees in community service.
• 50 hours of required community service from middle and high school students each year.
• Expansion of YouthBuild, which helps at-risk kids complete high school while building affordable housing in their communities.
• Allocation of 25% of college work study funds to community service projects.

He is also interested in creating incentives for social innovation.  As he said in Time Magazine , “We need to invest in grass-roots ideas, because the ‘next great innovation’ usually doesn’t come from government.”  He wants to:

• Create a Social Investment Fund Network to use federal seed money coupled with private investor capital to spur ideas that solve social problems.
• Create a new agency within the Corporation for National and Community Service to increase the capacity and effectiveness of the nonprofit sector.

Indeed, McCain and Obama were already working on some of these ideas when they co-sponsored the Serve America Act this past September.  The bill would create more AmeriCorps-like volunteer bodies to focus on the country’s most pressing problems (education, environment, etc.).  It would also create a commission to explore how government, nonprofits and the private sector can work more closely and effectively together.  And most interesting, it would create venture capital funds for the nonprofit sector to stimulate social innovation.  The bill is in committee right now and who knows where it will go from there, but since it mirrors much of Obama’s platform on service and the social sector, when he becomes president perhaps it will have a better chance of passing.

The service aspects of his platform are interesting and exciting, to be sure.  But what really excites me is the idea of a Social Innovation Fund that couples government and private money to seed solutions in the social sector.  I don’t know that we have ever lacked ideas for solving our social problems, but the real hurdle has been capital.  The social sector is sorely undercapitalized.  There are amazing programs out there nationally and here locally in Austin and the Southwest region.  But they are only able to grow incrementally because they lack the growth capital that is available in the for-profit side.  Any entrepreneur will tell you that it takes money to make money.  The same is true in the social sector:  it takes money to create real, lasting, sustainable change.  But nonprofits cannot create that change through incremental donations.  We need social venture funds with significant capital that can be smartly invested in programs that work.  Those investments ($100K+ over 3-5 years) will allow these programs to grow to scale, have broad and deep impact and really start to solve some of the toughest problems facing our country today.

Can you imagine the impact if an Austin nonprofit that is changing outcomes could scale their program?  Take a program like College Forward.  They could apply for and receive significant growth capital from such a fund.  They could take their program, which keeps students from dropping out of high school and moves them on to college, and expand it throughout Texas, throughout the country.  Instead of providing opportunities and futures to just 900 kids, as they do now, they could reach 9,000 or 90,000 kids.  They could transform a state, a region, a country, a generation.  That’s powerful.  And growth capital is how they would do it.

It will be interesting to see what a change at the top means and whether it will trickle down to the social sector nationally and here in the Southwest.  I’ll be watching closely.

Tags: Barack Obama, College Forward, Funding, innovation, John McCain, Nonprofits, Serve America Act